Money laundering in three easy steps

Everyone has heard of money laundering. It features prominently in TV shows like “Breaking Bad” and “Narcos” and just about every Mafia movie since the 1980’s. Despite this, few people know how money laundering works. A perfect example comes from the cinematic classic “Office Space”, where after executing a skimming scheme that is years ahead of its time, the cast looks up the definition in the dictionary and come away even more confused than before.

While understanding how money laundering works may be a mystery, what it does is well-known. Criminals, drug dealers, and terrorists want to spend their hard-earned money like everyone else. Therefore, they launder the money to make it appear legitimate. The process is complicated, but when drilled down to the basics, it consists of three steps that anyone can follow.

Step 1: Placement

Placement is what it sounds like, literally moving the funds into the financial system. This step is the hardest, where law enforcement catches most criminals in the act. Depositing the cash into a bank is the most obvious choice for putting the funds in the system. Banks are safe and offer a wide variety of ways to transfer and convert funds, which helps in masking the origin down the line.

Despite the financial security, banks come with a definite downside. The IRS requires all banks to monitor cash transactions over $10,000.00 with currency transaction reports. Trying to get around this requirement by making multiple small deposits or going to different branches will trigger internal alerts, and the bank will file a Suspicious Activity Report, where analysts document the activity, sending the information straight to the federal government. After the attacks on September 11, 2001, the federal government forcibly deputized the U.S. banks to identify criminal activity in the financial system as part of the Patriot Act. Failure to comply resulted in massive fines exceeding $600 million, so the banks are hyper-vigilant to look for possible crime.

Investment brokers and life insurance agents follow the same reporting requirements, so a great place to deposit illegal cash is real estate. However, criminals first need to find a builder who is willing to accept a sizeable down payment in cash, who will not ask too many questions about where it came from. On the downside, the U.S. Treasury Department issued Geographic Targeting Orders requiring realtors and builders to provide information on cash payments in high financial crime areas like New York City, Los Angeles, and even San Antonio.

For computer savvy criminals, cryptocurrency offers a new avenue for placement. They are semi-anonymous and unregulated. Identifying ownership is a strenuous process and sold at specific ATM’s in some large cities. On the other hand, the price of crypto-currencies fluctuates wildly, so $100,000.00 on plummet to $60,000.00 shortly. The security provided for cryptocurrencies is also lacking. Hackers wiped out major cryptocurrency exchanges such as Mt Gox, in 2014, leaving a $460 million hole that no law enforcement agency wanted to investigate.

When all else fails, bulk cash smuggling is a tried method. Criminals gather the cash and move it to a place where the bankers ask fewer questions about where cash deposits come from. This act is a risky move. Taking money through customs, requires cash over $10,000.00 declared at the border. Further, most banking locations willing to look the other way are located in places where transporting large amounts of cash is safe.

Step 2: Layering

Now, imagine that the hypothetical criminals deposited the cash in the financial system, without alerting the authorities or being robbed in a foreign country. It is time to start moving the funds around. This disguises the source of the funds from the original criminal activity. The more the cash moves, the harder it becomes for investigators to see through the web of action and trace a path back to the source.

Investments in the stock market are a reasonably safe place to hide funds. Stock portfolios are stable and allow money to gain dividends over time. Purchasing a front company or a using a shell corporation is also a popular choice. These options provide legitimate covers for criminal activity and might assist in placing future illegal funds. One drawback comes from increased scrutiny the shell companies are now receiving. Exposes on the Panama Papers and the Paradise papers are now drawing scrutiny from banks over wires from overseas companies, with little or no stated business purpose.

In layering, criminals realize that they will lose a little off the top to move the funds. The going rate is approximately 20%, but it is worth the cost. Through going to casinos and taking out a line of credit, initial losses occur. Despite that fact, in the end, the money appears legitimately won. Many criminals also issue personal loans at low-interest rates and then offered a quick payout for cents on the dollar.

Purchasing luxury items, like gold bars, jewelry and cars are also favored ways to layer funds. These are good investments for layering because they maintain a high value, are sold for a profit and owning high-end goods is always a benefit. The drawback to any layering scheme comes from moving funds too quickly. Banks and credit card companies monitor purchases and transfers closely. Therefore, if a middle manager living on a $60,000.00 salary suddenly starts living the life of a Las Vegas high roller and wiring all the money to Hong Kong and Macau, alarm bells start going off for investigators.

Step 3: Integration

Integration is the final step that all criminals and terrorists look forward to reaching. After placing cash into the financial system and moving it around, it is time to enjoy life. There are still risks in this phase. Banks monitor cash withdrawals just as tightly as deposits and file CTRs and Suspicious Activity Reports accordingly.

Once legitimized, there are multiple options to recouping the funds from the financial system. Criminals withdraw funds from stock dividends, sell a luxury car or even cash out the funds from a front company. Once criminals legitimized the cash, determining the origin is difficult for law enforcement. Russian Oligarchs serve as a prime example. They buy ownership in sports teams, expensive houses in London and sail in yachts despite being targeted sanctioned.

Caveat

One might observe, that the steps may work better in different orders and that they are cyclical. This is correct in both aspects. A good layering scheme makes placing the money easier. A legitimate source of funds like a successful front company makes mingling funds less complicated. One drawback to money laundering is the limitations of places that one person can move funds.

Eventually, if a criminal organization is successful, there will be too much cash to hide. Zhenli Ye Gon, a Chinese Mexican citizen, was arrested in 2007 for trafficking methamphetamine into the U.S. When Mexican authorities raided his villa in Mexico City, they found 2 tons of U.S. $100 bills worth over $200 million. The sheer volume of cash simply proved impossible to move without drawing attention.

Conclusion

This introduction covers only the basics of money laundering. Knowing the three basic steps may not necessarily provide expert insight. However, it does lead to a better understanding of how the drug trade and terrorism finance works. Additionally, on a personal note, please keep this a hypothetical conversation. The one thing that “Office Space” gets right is the money launderers do not go to “white collar resort prison”!

About the Author

About Matt Peyer

Matt Peyer is a Marine Corps Signals Intelligence analyst turned money laundering investigator for a national bank. He has a bachelors degree in history from Illinois State University, a masters degree in Financial crime and compliance management from Utica College. Don't bother trying to follow him on twitter, this is about as interesting as he gets.

BECAUSE, FACTS DON'T TAKE SIDES

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Here's a sample of the comments on this post.

Tony S

I cannot believe you post this...amazing how you give away info to enemies!! Shit.

Jason P

Happens every day

Joni S

My friend was really shocked. He had no clue. This was in a decent part of town and he was just trying to save money with two kids driving and getting ready to go off to college. Funny thing he is an accountant... but not for the cartels... LOL!

Mic-Mac (Micky)

Very interesting Matt. Not to long ago I read a book “Bones” about how a Drug cartel used buying and selling of champion quarter horses to launder money.

Jason P

That is very common. Open a few used car lots in a worst part of town. Use your illicit proceeds to buy cars at auction. On paper you sell X amount per month, but in reality you swap them with other cartel car lots so that you don’t have the same stock every month. No one pays attention to used car lots in the bad parts of town.

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